The beginning of 2017 was a time of hope and optimism on Wall Street. The election of Donald Trump had changed everything from policy and growth expectations to expectations about inflation and more.
The ramifications of those changing expectations had just started to play themselves out in the U.S. stock market. With that in mind, we chose ZION stock to be one of the top-performing stocks in 2017.
We believe ZION was uniquely situated to take advantage of a growing number of the potential changes that were expected to play themselves out in the U.S. economy and stock market this year. The Trump administration, for example, could bolster ZION by:
- Scaling back, or fully repealing, the Dodd-Frank Wall Street Reform and Consumer Protection Act
- Boosting inflation expectations
- Relaxing environmental regulations for drilling while OPEC caps oil production
- Lowering corporate tax rates
While the Trump administration has been successful in a few of these areas, it has thus far fallen woefully short in others. Let’s take a look.
Scaling Back, or Repealing, Dodd-Frank
We were looking forward to the scaling back, or repeal, of the Dodd-Frank Act and believed it would boost ZION’s revenue-generating potential by enabling the bank to trade more freely and issue more loans by creating collateralized debt obligations (CDOs) containing trust preferred securities (TrPS). We also anticipated a reduction in expenses for the bank as compliance costs fell.
Unfortunately, not much has happened on this front. In fact, Treasury Secretary Steven Mnuchin has even expressed some support for the Volcker Rule — the portion of the Dodd-Frank Act that prohibits financial institutions from engaging in proprietary trading.
It’s still early, but with all of the other legislative priorities stacking up in front of financial regulatory reform, we aren’t as confident this issue is going to be addressed in the near term.
Boosting Inflation Expectations
We, along with most others, expected President Trump’s economic policies to boost inflation here in the United States. Analysts were anticipating increased economic growth, coupled with the potential for trade battles and the implementation of tariffs, would boost inflation.
As a result, bond yields would be pushed higher to compensate bond investors for the increased inflation risks they would face. This, in turn, would lead to a steeper yield curve, which would be a boon for banks.
Unfortunately, the “reflation” trade that dominated the market through the end of February has faded, and the yield curve is flattening once again. This is a negative for banks and their net interest margin levels.
Environmental Regulations and OPEC Production Cap
Trump made good on his promise to relax environmental regulations for energy producers, including opening up previously unavailable areas for oil exploration, when he signed his “energy independence” executive order on March 28.
This should benefit oil producers here in the United States, some of whom have taken out loans from ZION.
This should help the company reverse the rising tide of having to increase its loan loss provisions to compensate for the number of charge-offs in the energy sector.
Lowering Corporate Taxes
With the failure of the Congress to repeal and replace the Affordable Care Act (ACA), many are wondering if the Trump administration is going to be able to do what it takes to reform the U.S. tax code and lower corporate taxes.
ZION has shown in the past that it is more than willing to send cash back to shareholders in the form of increased dividends and share buyback programs. But if tax reform fails to materialize, the company won’t have any savings to pass on to shareholders.
Each of the four fundamental factors we’ve discussed above has to potential to lift ZION to new multi-year highs on its own, but our confidence in them all coming together to push ZION higher has dropped somewhat.
ZION hasn’t really moved anywhere since we first looked at this stock at the beginning of the year. It has been up and down, but there has been no net change.
It still has the potential to climb back up toward longer-term resistance at $55 during 2017, but it can only happen if the Trump administration and Congress can come together on tax reform.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.